Tag Archives: regulation

New Financial Advisor Regulation will have little impact

Thesis: Obama’s regulations for the financial advisory industry will have little impact on advisor behavior.

President Obama last month said in a speech to members of the AARP (American Association of Retired Persons) that he has given the Department of Labor the permission to change its rule and the definition of fiduciary under the Employee Retirement Income Security Act. This simple change of one word’s definition has people in the financial advisory industry worried. The reasons behind this proposed change are obvious, to require the financial advisor to act in the best interest of their clients and disclose any and all fees associated with all potential investments ahead of time. Obama and his supporters argue here that the reasons for this this proposed rule changes are “that consumers are entitled to unbiased information, and that commission-based compensation structures generate inherent conflicts of interest.” The opposition argue that these changes will cause advice to “become more expensive or not available at all for small accounts or individual plan participants.” I am going to argue that these proposed changes will have almost no impact on advisor behavior.

I make my assertion that these changes will have little to no impact on advisor behavior because I am assuming that clients are going to be acting in the best interest of themselves and their own well being. If these clients are acting in their own best interests, then over time advisors who are charging higher fees for not acting in the best interest of the client will be weeded out. This is because if two advisors are identical and offer the same investment advice, but one, acting in the best interest of the client, invests their client’s money in a lower fee mutual fund, while the other advisor, not acting in the best interest of their client, invests the money into an equal mutual fund but one that charges higher fees for themselves, the returns for advisor #2 will be lower after all fees. This lower return will, over time, cause clients to switch advisors and go to the one who is acting in the best interest of their clients. They will do this whether or not they even realize if their current advisor is acting in their best interest because the returns will, on average, be lower for financial advisors not acting in their clients best interests. This process will act as a filter in and of itself to remove financial advisors who aren’t acting in the best interest of their clients. Over time, as people realize they are not getting the most out of this relationship, they will move their money to advisors with higher returns who already act in the best interest of their clients.

Even though as Jason Zweig writes in his article, “Mary Jo White, chairman of the SEC, voiced her view that stockbrokers, insurance agents, and other financial salespeople should have to put their clients’ interests ahead of their own” making any changes to the wording of the rules in place will not significantly impact on financial advisor behavior.

Netflix, Net Neutrality, and Beyond

Thesis statement: The internet needs more regulation to prevent power houses from utilizing their position to promote their position.

The basis of my argument revolves around a fundamental concept: the internet is a utility. The internet has become a fundamental part of our lives similar to electricity. I know that I personally feel lost if I am ever without an internet connection. On that note, the internet needs to be regulated similar to other industries. A key concept that governs internet regulation revolves around net neutrality – which is a principle that all internet traffic is treated equally. That means that data and broadband services cannot be manipulated or altered based on the type of application being used by the consumer. An example that is questioned to violate net neutrality recently involves Netflix – the streaming video an TV show provider.

In an article published by the Wall Street Journal titled “Netflix Recants on Obamanet,” author L. Gordon Crovitz calls out Netflix for violating net neutrality. “Last week, Netflix violated a core tenet of net neutrality when it launched its service in Australia as part of a “zero rating” offering by broadband providers, which excludes its video from data caps. Net neutrality advocates want to outlaw such deals. Netflix shrugged off this objection: ‘We won’t put our service or our members at a disadvantage.’” So Netflix clearly violated net neutrality and admitted to it, but there is no organization with authority or jurisdiction to enforce it yet. Now although the move by Netflix was to advantage their consumers (rather than attack competitors), they still violated net neutrality and faced no consequences. It is worth noting that I am picking on Netflix here simply because they are the largest provider of online streaming video services and are best positioned to be able to take advantage of the lack of internet regulation. You could even go far enough as to say that Netflix has a monopoly (which it is economically beneficial to have more regulation to prevent monopolies).

Those familiar with government regulation regarding monopolies may ask: if Netflix is already a monopoly, then why isn’t any legislation being brought about onto them? My response is that the online video streaming service industry is not that large or quintessential to consumers as say telecom. For that reason, the telecommunications industry is much more heavily regulated and recent laws have been enacted to prevent a duopoly among the two largest wireless telecom providers Verizon VZ and AT&T T. It is also for this very reason that the internet needs more regulation. While wireless telecom has scale and is concise in its services (calls, texting, data, etc.) the internet is highly fragmented and has many different facets (web browsing, broadband, streaming, data, etc.). So it is important that there is general oversight over the internet to prevent monopolies from occurring in specific segments to promote capitalism. Because although Netflix might not be considered a monopoly by traditional measures, they possess unique pricing power and capability to take advantage of the lack of internet regulation.


Auto Makers ‘Kill Two Birds with One Stone’

Thesis: Auto makers should get government credit for autonomous cars leading to reduced emissions.

Large auto makers are teaming up to try and persuade the government to give them credit for the cleaner environment and fuel efficiency that autonomous cars will create. This credit will be to count towards the corporate average fuel economy requirements that the government is forcing upon auto makers to try and reduce carbon emissions. These auto makers remain a long ways away from the stringent requirements that the National Highway Traffic Safety Administration and the Environmental Protection Agency set to be reached by 2025. As Tom Krisher wrote in his article, Fuel Efficiency Standards, “The rules mean that all new vehicles would have to get an average of 54.5 miles per gallon [by 2025]… The requirements will be phased in gradually between now and then, and automakers could be fined if they don’t comply.” As Mike Spector wrote in the Wall Street Journal in his article, Self Braking Cars Are Safer, but Do They Boost MPG?, “Through the first two months of 2015, the average fuel economy of new light vehicles sold is just 25.2 mpg.” This means that these auto makers will have to more than double the current mpg standards in just ten years. This seems like a far fetched goal, which is why auto makers are fighting for these credits on autonomous cars.

Auto makers are arguing that “as safety features like automatic braking and adaptive cruise control become more widely available, traffic accidents are expected to fall. Fewer accidents will lead to less congestion and better traffic flow—factors that, when combined with speed management, could cut vehicle emissions by as much as 30%.” These improvements in the safety of driving cars will in turn lead to reduced emissions, which is why car companies should get credit. The entire purpose of the Obama administration’s decision to impose such strict measures was to reduce emissions, which will occur through these autonomous cars. While it may be a different, non-direct, route to reduced emissions, it is one that has many societal benefits. Not only will these autonomous cars reduce emissions, they will save lives! The government should encourage auto makers to make as much autonomous as possible to both reduce emissions and make cars much safer to drive. The government can should be doing all it can to encourage these auto makers to develop as many autonomous safety features as possible to achieve both ideal goals. The biggest argument against giving these auto makers these credits is that the government “contend auto makers are simply trying to get around meeting tougher mileage targets. They point out the auto industry has met requirements in previous years and shouldn’t get extra credit on fuel economy for making vehicles safer.” This viewpoint is confusing the underlying purpose of the regulations. As Tom Krisher wrote, “the regulations, will change the cars and trucks sold in U.S. showrooms, with the goal of slashing greenhouse gas emissions and fuel consumption.” Autonomous cars increasing safety leads to decreased traffic congestion are accomplishing the underlying purpose of these regulations. This is why the government should start giving credit to automakers for these contributions autonomous cars are making for society.

New Proposed Oversight Regulation Could Lead to Less Regulated Markets

A new law in the European Union is in the early stages of being implemented that will require, as Margot Patrick and Juliet Samuel write in their Wall Street Journal article, New Rules Reshape Research Sector, “investment managers, such as those at hedge funds, to pay specifically for any analyst research or services they receive.” Some people are claiming that this law will be good by fixing an old outdated system where as Matt Levine writes in his article, Valuing Analysts and Hedging Death, “High finance operates on basically a gift economy, in which many goods and services — sports tickets, strategic advice, jobs for relatives, investment banking research — are given away to create goodwill in the recipient. The recipient is then supposed to reward the donor with lucrative merger mandates or trading commissions, but not in a straightforward transactional way. That would be crass. This is about relationships, not a mechanical balancing of accounts.” While I agree that this system is outdated, I am going to argue that this new law is going to lead to less regulated markets in two distinct unintended ways that create a system worse off than before.


The first unintended consequence of this law will be that some people and organizations will get information before others. Whoever pays the most will have first access to research and therefore be able to act on this research before others. This will create an even greater imbalance in the stock market towards large institutional investors (such as hedge funds) over individuals. The large hedge funds will be able to pay the most for this research and act upon it before others may even receive this research. This will lead to a market where firms pay extra to have these research reports before their competitors. You could have already purchased a report, but not received it because your competitor paid twice as much to receive it before you. This will create an imbalance and a largely unregulated market of firms having access to more resources and research than their competitors, not leveling the playing field in the slightest.


The second consequence of this law will be that it “could be most damaging for small brokers, particularly those specializing in less-traded stocks from smaller companies. Those brokers could end up out of business, if money managers use less research and fewer providers, industry officials said.” This will not only be devastating for smaller brokers, but will create a relatively large sector of smaller companies whose stocks don’t trade as frequently largely unregulated. This will leave certain companies without any research done on them, which could potentially leave companies susceptible to being part of a bubble because of lack of research on them. At the very least this lack of research will reduce the amount of transparency in this part of the market, the opposite effect of this new law.

Reversing the Culture of Wall Street

The culture at large banks must be drastically changed to drive industry growth and success. In-house adjustments will have a greater long-term positive impact on financial systems than new outside regulations that may only be impactful short-term.

“As they emerge from years of bruising fines, layoffs and losses, big banks are trying more than ever to monitor employee attitudes and values to avoid future problems” (http://www.wsj.com/articles/as-regulators-focus-on-culture-wall-street-struggles-to-define-it-1422838659?mod=WSJ_hp_Markets3up).

Large banks are trying to fix their culture issues on their own, although they are pretty much forced to due to fear of drastic government intervention and regulation. There are many regulations in the banking industry, but in such a complex system like ours there is always the possibility of employees attempting to cheat the system by disregarding those regulations or through the use of regulatory loopholes.

“One consulting firm hired by a major bank determined it was a red flag when employees used the word “workaround” in internal communications, indicating a willingness to bypass set rules or policies” (http://www.wsj.com/articles/as-regulators-focus-on-culture-wall-street-struggles-to-define-it-1422838659?mod=WSJ_hp_Markets3up).

This is one of the reasons why, I believe, the change needs to come from the inside. Simply changing the system of regulation will not do enough, that has been happening for years and issues are still arising. If banks, or any company for that matter, have a corrupt culture, employees will always have an incentive to work hard to cheat the system. Doing whatever it takes to standout to senior management and the people that will eventually be determining whether or not they receive a promotion. If banks have a system that promotes and rewards ethical behavior exhibited by their employees, the incentive to cheat the system seems like it would be greatly reduced.

“The concern, the banks say, isn’t so much the black-and-white issues, like whether to take money from the till. The problems arise with the more nuanced situations, like whether to report a trading loss right away or to try to fix it before anyone else notices” (http://blogs.wsj.com/moneybeat/2015/02/02/what-banks-are-doing-to-improve-their-culture/).

It seems how banks measure success plays the largest factor in their employees’ behavior. Everyone wants to attain that “big” promotion, or standout amongst their colleagues, and I believe, especially in finance, they will do whatever it takes to achieve that goal. If taking large risks, or disregarding the rules and regulations is the method of achieving success, then that will be the type of behavior and performance exemplified by a company’s employees. However, like I mentioned above, if success is measured as people who behave ethically, for example by not ignoring unethical actions and going as far as actually reporting those actions to managers, then employees will strive to behave in that way when they are trying to climb to corporate ladder. It seems that all people want be successful and most of the time they will do whatever it takes to achieve success, no matter how it is defined. Changing the way individual banks measure success, in-house, could go a long way in changing the culture of Wall Street as a whole.